Can International Law Address Coercion by Global Financial Institutions?

Can International Law Address Coercion by Global Financial Institutions?

The involvement of International Monetary Fund (IMF) in the financial dynamics of Pakistan is well known and similar actions pertaining to heavy loans being provided to countries (mostly developing countries) by the IMF or World Bank are quite common as well. Countries with struggling economies, like Pakistan, Greece, Latvia, Iceland, Argentina, Ecuador or African countries like Ghana, Tunisia, Sierra Leone, etc. when faced with a budget deficit often have to resort to measures such as borrowing from international financial institutions like the IMF, but the matter does not end there – the cycle of poor budgeting and borrowing continues until the borrowing countries pile up vast amounts of debt which they are unable to pay and end up signing unfavourable agreements with these institutions.

This activity of states with struggling economies being coerced into signing treaties which do not favor them is not limited to international institutions – rich countries have also played their part in giving predatory loans to underdeveloped and developing countries such as Laos, Sri Lanka, Kyrgyzstan, etc. and eventually taking hold of important economic objects, for example, in 2017, Sri Lanka after being indebted to China for more than $1 billion had to hand over one of its main sea ports. Such an act has been referred to by many economists as debt-trap diplomacy.

The purpose of this article is not to discuss a debt-trap or its impact, but to shed light on whether such agreements are permitted and accepted under international law. The international instrument governing treaties is the Vienna Convention on the Law of Treaties (VCLT) 1969 which is currently ratified by 116 countries across the globe. States which have not ratified it still acknowledge some of its provisions which are similar to those under customary international law.

Most provisions in a treaty are related to a state’s consent and sovereignty which are extremely essential components of international law. Therefore, VCLT 1969 prohibits treaties signed by states in error of a situation wrongly thought by a state to exist, either through misrepresentation or mistake (Article 48), or fraudulent inducement by another state (Article 49), or procurement of consent through acts of corruption by a state’s representative (Article 50).

Moreover, the Convention prohibits the coercion of a state by another state to ratify a treaty. Provisions of the Convention which talk about such a prohibition are Articles 51 and 52. Article 51 categorically states that the consent of a state obtained through coercion (in the form of acts or threats) against it will not have any legal effect, while Article 52 deals with coercion through the “use of force” which is a violation of the Charter of the United Nations.

The focus of this write-up remains on Article 51 and what it prohibits. There have been several debates between nations and several arguments put forth by international law writers regarding what best describes coercive agreements today. It has been submitted that coercive provisions are based on inequality between parties and treaties with unequal terms are not legally binding.

Going with this notion, debt-trap agreements also seem to be coercive, creating inequality between the states based on their financial standing, favoring one party nearly absolutely and forcing states to sign reluctantly due to power dynamics. Activities such as handing over seaports, giving control of national corporations and excessive rates of interest on ordinary loans can never be consensual.

The international legal community must not turn a blind eye to this grave violation of VCLT 1969. While the international community may have restricted the scope of Article 51 to physical acts or threats of force, the use of diplomacy to gain similar results should also be unacceptable because at the end of the day, if the consent of a state is being obtained through coercion and such coercion causes inequality and unfairness between state parties, then such a treaty should not be legally binding or valid under international law.


The views expressed in this article are those of the author and do not necessarily represent the views of or any other organization with which he might be associated.

Hubaish Farooqui

Author: Hubaish Farooqui

The writer is the Executive Editor of SZABIST Law Journal 1.0 and a final year law student at SZABIST Karachi. He has served as an intern at Courting The Law.